Do you remember when Covid led to empty shelves, panic buying of toilet paper and then when it all ended – a surge in inflation? It was only 3 years ago, though it feels longer. However, US stores could soon see looming shortages as 145% tariffs on China caused a sharp drop in US imports from China. According to Vizion, overall shipping traffic from week starting April 7 dropped 64%. This fall continued in the next week, leading to Chinese imports falling 45% year on year. It has led major retailers to warn of empty shelves of goods, which usually come from China – toys, electronics and clothes are likely to be particularly hit. And in a bizarre recreation of Covid, many ships are now stuck in China, rather than sailing to the US. Hapag Lloyd says bookings from the US to China are down by a third and it causing US ports to be unusually empty. It takes two – three weeks for a container ship to travel from China to the US, which means shortages won’t appear for a while. But, it also means – even if tariffs are remove,d it could take a few weeks to restock shelves. Toy retailers are particularly worried as toys come almost exclusively from China. Over 80% of companies are cancelling orders and 45% say they are at risk of going out of business over the next few weeks. And it’s not just retailers. Soybean and beef farmers have been hit by retaliatory tariffs, but arguably the biggest losers will be those in the logistic industry, lorry drivers and port workers who will be adversely affected by a trade freeze.
The US imports over $500bn of goods from China, and in the short-term at least this will be very hard to replace. American consumers have got used to cheap imports from China, and these tariffs will be a shock. Temu, which has become popular amongst American consumers, exports goods directly from China to US buyers, but it is now significantly raising prices. It could be the end of an era of cheap consumer goods. Who wants to buy an iPhone costing $2,500? But, inflation is not just about tariffs raising prices. There could also be the knock on effects. Going back to Covid, why did inflation surge so much? Probably the most important factor is that after Covid, ships were often in the wrong places, stuck on the other side of the globe. When suppressed demand surged at the end of lockdown, it was really hard for shipping to keep up with demand. This led to a surge in the price of shipping, starting inflationary price rises. This unprecedented level of tariffs and disruption to trade between China and US risks creating new sources of friction in shipping and trade. The introduction of tariffs is causing firms to stockpile for fear of shortages, but these swings in demand and supply, are likely to create opportunities for higher prices.
Another factor in the Covid inflation is that when costs started to rise. Firms took the opportunity to pass on even more prices to consumers. Basically, firms thought if costs are going up 14%, we might as well round it up to 20%, whose going to know? You could call it greed inflation. Volatility and swings in inflation make it much easier for firms to add a few extra percent on to increase profit margins. This is why corporate profitability in the US increased so much during the covid era. Now, another factor in Covid was that in the US at least stimulus spending and more quantitative easing also increased demand, which added another inflationary fuel to the mix.
Today, that robust demand is not really there. Households have been squeezed by cost of living and relatively limited growth in real wages. The US saving ratios have fallen, and consumer indebtedness has increased. This contrasts with the UK where the savings ratio has increased, reflecting long-term pessimism. US consumers were actually quite happy to spend in past few years, but the tariff uncertainty has caused a rise in inflation expectations and fall in confidence. Many households are living on the edge, using loans to pay for even basic grocery items. The sight of empty shelves will undoubtely be splashed around social media. It’s the kind of thing that can easily be exaggerated. But, in economics, you can never underestimate the importance of confidence and animal spirits. Whether fair or not, the trade war is denting consumer and business confidence.
It’s not all bad in the US economy. In recent years, US growth and productivity have actually been much greater in the US than Europe. The Resolution Foundation produced interesting report why US productivity is so much better than the UK. That isn’t all going to suddenly evaporate. However, the US really does has a two speed economy. The share of income going to small business and employees has fallen, The share of income going to corporate profit and rental income has increased. In fact, if you want to understand the story of the US economy in the past couple of decades, these graphs goes a good way to explaining it. Yet, even the conservative-based IMF, have significantly downgradedthe growth forecast for the US economy for this year. Perhaps they are assuming the trade war will be partly resolved, but there is no guarantee of this. There are plenty of others who argue that distressed household finances could easily tip the US economy into recession.
Back to inflation, what about the role of the Federal Reserve? Many blame money creation in 2022 for causing the inflationary surge. This is part of the story. Many countries had the same inflation rate without any money creation or fiscal stimulus. But, the stimulus cheques undoubtedly fuelled some of the US inflation, studies suggest around 25%. But, the point is what about this time? The Federal Reserve is under pressure to cut interest rates, to reduce borrowing costs and support the economy. However, at the same time, it is not like the 2010s, when inflation was low. Inflation is likely to rise because of tariffs, and furthermore, the dollar has fallen 10% this year. It is worse than even 1973, and the first oil price shock. A big reduction in interest rates and a sense the federal reserve is losing its commitment to low inflation would come at a bad time and put more downward pressure on the dollar. A falling dollar and rising interest rates come at a bad time, given US debt is soaring. The deficit was 7% of GDP last year, and is likely to increase with more tax cuts. For all talk of tariff revenue replacing income tax revenue, this is unlikely to occur. Tariff revenue is still very small. Don’t forget if you have very high tariffs, the good don’t get imported, and 145% of zero sales is still 0$ income.
Already, foreign investors are showing signs of losing commitment to US dollar assets. But, if US debt is going to soar, foreign purchases of US treasuries will be important.
One final difference with 2022, is that oil prices have plummeted on prospects for global trade war. This will reduce inflationary pressures and help. But, it will also hit the US oil and gas industry. Interestingly, a big reason for the difference in UK and US productivity was actually in the oil industry. A continued low price of oil could cause a recession in US shale oil, which is expensive to produce.
Sources
https://www.vizionapi.com/blog/tariff-shockwave-us-import-bookings-collapse-after-q1-surge